Construction contractors new to surety bonds are often wondering exactly what are the performance bond underwriting requirements the surety company is looking for when they review financial statements. We will start start with the most common considerations.
While each surety company may few working capital differently, a good rule of thumb is working capital should be at least 5% to 10% of the current cost to complete of all jobs. this is found on a work in progress schedule. For example, adjusted working capital is $100,000, that should support a back log of cost to complete of $1mm at a 10% working capital ratio. The performance bond underwriting requirements are somewhat subjective as well. Positive working capital made up of a high percentage of cash will carry more weight than working capital of mostly accounts receivable. For emerging contractor, the SBA surety bond guarantee program may be an attractive alternative to the standard underwriting companies.
This performance bond underwriting requirement is simple to understand. Net worth can be considered a good gauge to the ability of a construction company to absorb a loss. Like adjustments to working capital, the surety company underwriters will make adjustments to the analyzed net worth. Intangible assets, like goodwill, or intellectual property will be deducted from the net worth calculation. A portion of inventory, accounts receivable over 90 days, and the value of unsettled claims, are examples of downward adjustments the surety will make to net worth. A general rule of thumb, net worth should be 10% to 20% of the cost to complete on all open jobs.
Surety bond underwriters thrive on ratios. The financial ratios can only be as good as the information reported. Internally prepared financial statements or financial statements prepared by an outside bookkeeper will not carry the same weight as financial statement prepared by a construction oriented CPA firm. Also, there are different levels of CPA prepared financial statements. A review quality statement will be better than a CPA compiled financial statement. Having a working capital line of credit with a bank is a positive attribute as well. For the SBA bond guarantee program, the SBA will even consider an unused bank line as available working capital. Other performance bond underwriting requirements, including those not of a financial nature can be found here.
Surety1.com is a service of AssuredPartners one of the largest and fastest growing insurance agencies in the nation. Representing over a dozen surety bond companies, Surety1.com is the premier provider of performance and payment bonds for construction contractors, nationwide since 2003.